The four patterns worth knowing

There are four candle patterns worth learning: the engulfing candle, the pin bar (also called a hammer or shooting star), the inside bar, and the doji. Each is a specific story about buyers and sellers, and each is easy to see. Learn what they mean, not just what they look like, and you will recognize them on any chart in any market.

Every one of these only matters in context. A pin bar in the middle of nowhere is a candle with a long wick. A pin bar at a level, after a move into that level, is a signal that the move may be over. Keep that in mind on every example.

1. The engulfing candle

An engulfing candle has a body that completely covers the body of the previous candle, in the opposite direction.

                  |
                +---+
   |            |   |
 +---+          |   |
 |###|          |   |
 |###|          |   |
 +---+          |   |
   |            +---+
                  |
  prev         engulfing

The story: the previous period was a win for sellers. The next period opened near that low, and buyers not only recovered the entire loss but pushed well past it. Everyone who sold during the previous candle is now losing. Everyone who sold at the open of the engulfing candle is losing badly.

A bearish engulfing candle is the mirror image: a green candle followed by a red one whose body swallows it. Sellers erased the buyers' work and then some.

Engulfing candles matter most after a run of candles in one direction, at a level, because that is when there are the most trapped traders to fuel the reversal.

2. The pin bar (hammer, shooting star)

A pin bar has a small body and one wick at least two to three times the body's length. The long wick "pins" a price that was rejected.

   Hammer          Shooting star

     |                  |
   +---+                |
   +---+                |
     |                  |
     |                  |
     |                +---+
     |                +---+
     |                  |

The hammer: sellers pushed price down 1.50 and were completely rejected; the close is back near the open. Sellers at 28.60 through 29.50 are trapped. The shooting star is the reverse, with trapped buyers up in the wick.

Traditional books call a bullish pin at a bottom a "hammer" and a bearish pin at a top a "shooting star," with more names for variations in colour and position. You do not need the names. You need: long wick, small body, where was the rejection, who is trapped.

3. The inside bar

An inside bar is a candle whose entire range (high to low) fits inside the range of the previous candle.

      |
    +---+
    |   |     |
    |   |   +---+
    |   |   |###|
    |   |   +---+
    |   |     |
    |   |
    +---+
      |
   mother   inside

The story: after a big move, nobody was willing to push beyond the previous range. Both sides are waiting. Inside bars are consolidation in its smallest form. They matter because whichever way price breaks out of the mother bar's range tends to attract orders; traders who waited now have a reason to act.

Inside bars are not directional on their own. They say "pause," and the resolution comes when price breaks the mother bar's high or low.

4. The doji

A doji is a candle where the open and close are almost identical, so the body is a thin line. Wicks can be short or long.

      |
      |
    --+--   <- body is a line
      |
      |

The story: buyers and sellers fought to a draw. A doji after a strong run says the winning side has stopped winning. A doji in a range says nothing at all; ranges are made of draws.

A doji with long wicks on both sides is sometimes called a long-legged doji, and it is the purest form of "both sides tried, both failed." Expect a decisive move soon, but the doji does not tell you which way.

Key idea: Engulfing means one side erased the other's work. Pin bar means one side was rejected hard. Inside bar means pause. Doji means draw. Each is only worth acting on when it appears at a place where a reversal or breakout would make sense.

Putting context first

Here is the same pin bar in two different places:

  Situation A: pin bar at prior support after a drop

  |
 +-+
 |#|
 +-+ |
     +-+
     |#|
     +-+ |
        +-+
        |#|
        +-+  |
           +---+
           +---+    <- hammer at the level where price bounced last month
             |
             |
             |
  ----------------- prior support

  Situation B: pin bar mid-range

  ----------------- range high
       |   |
     +---+ |     |
     +---+ +-+ +---+
        |  | | +---+
           +-+   |
                 |
  ----------------- range low

Situation A is worth a trade plan. Situation B is a candle. Same shape, different meaning, because the number of trapped traders and the reason for the reversal are completely different.

Try it: Scroll back through a daily chart and find one clean example of each of the four patterns. For each one, write a single sentence starting with "The people who are trapped are..." If you cannot finish the sentence, the pattern is not meaningful in that spot.

Recap

• Engulfing: a body that swallows the previous body in the opposite direction. One side erased the other.
• Pin bar (hammer or shooting star): small body, one long wick. One side was rejected and is trapped in the wick.
• Inside bar: a range entirely inside the previous candle's range. A pause before a break.
• Doji: open equals close. A draw, meaningful only after a one-sided run.
• Context decides everything. The same candle at a level after a move is a signal; in the middle of a range it is noise.